A former Liberal Democrat spin-doctor says Cable’s off message on executive pay

THE Liberal Democrats have spent much of their conference getting themselves into a sweat about the rich. Both Nick Clegg and Danny Alexander have signalled their reluctance to scrap the top rate of income tax, with the latter announcing the creation of 2,000 new tax collectors to ensure compliance among high earners. Don’t expect that to yield much of a return. The affluent are acting rationally rather than illegally in reaction to one of the highest marginal tax rates in Europe.

I had hoped for a change in tone from the business secretary, perhaps detailing how we could extract ourselves from economic gloom and stagnation, rather than simply obsessing about how to distribute the pain in an era of austerity. My hopes were largely dashed. The eye-catching part of Vince Cable’s speech in Birmingham yesterday was his onslaught against undeserved executive pay. Echoing the Lib Dems’ positioning that times are tough and the successful must pay their fair share, Cable has launched a consultation to get to the bottom of why chief executives’ overall remuneration packages have become so spectacularly more generous (rising about fourfold in nominal terms, from an average of £1m per annum to £4.2m since 1998). Without a corresponding rise in company share prices or the pay of the average worker, Cable sees a strong prima facie case for market failure. He argues it’s not just that the chief executives of our leading companies are fantastically well paid – it’s that it appears to be so undeserved.

His consultation paper floats a plethora of ideas – greater shareholder power, more transparent reporting mechanisms and employee involvement on remuneration committees. Such changes, the business secretary surmises, could save shareholders from their own apparent largesse and naivety and would presumably see a drop in top pay until Cable deemed that “proper market rates” now prevailed.

But with due deference to the business secretary, it is surely likely that if his ideas have any substantial weight, they would have been dreamt up by shareholders themselves by now. So while shareholder resistance to high pay has perhaps increased, it has not reached levels of widespread, majority outrage.

The problem – as with any form of grand central planning – is that the metrics that Cable considers reasonable and obvious in determining chief executive pay are actually highly contestable. Zooming share value, high dividends and growing profits may be down to the brilliance of the chief executive. But, similarly, in an ever-competitive market it may be that a business miracle has been performed simply by halting a slide. This isn’t to say that shareholders won’t use certain measurements to attempt to judge the performance of senior staff – most of us are judged on targets that aren’t wholly within our control – but a sense of a wider picture will also be needed.

As Cable concedes, we are talking about a microscopically small number of individuals. Executive pay for FTSE 250 companies has grown considerably less impressively (chief executives now earn about 38 times UK median pay compared to 24 times median pay in 1998) and among Aim-listed firms, remuneration has broadly tracked average pay since the late 1990s.

The broader concern – even if shareholders latch on to Cable’s departmental consultation paper with undisguised enthusiasm – is how much time and effort Liberal Democrat ministers seem willing to devote to redistributive measures and how little to making Britain an attractive place to do business.

It is unarguable to the point of banal to insist that the rich must pay their “fair share”. The harder part is spelling out what that fair share actually is. The top 1 per cent of earners now contribute around a quarter of income tax receipts and the top 10 per cent account for more than half of this revenue. Is this too much of a burden for those with broad shoulders? Or not sufficient? If insufficient, how high a proportion would the Liberal Democrats like to see it rise to?

And whatever definition of a fair burden they finally settle on, how do they react to the top marginal rates of tax we find on our doorstep? Presumably the fact that the highest rate of tax is below 50 per cent in all of Germany, Italy, France and Spain must horrify Lib Dem conference delegates. Unfairness must be rampant among our trading partners.

Businesses and entrepreneurs react to hard facts more than to political rhetoric. A sideswipe at the super-affluent to appease Liberal Democrat activists in a conference hall in Birmingham is not going to lead to an immediate brain drain from these shores.

It would, however, be refreshing if the business secretary spent his next speech detailing how he intends make the country a more attractive place for the rich, bright and successful to flock to rather than to be fleeced in – and how he is going to make it easier for them to run profitable businesses when they get here. Nobody doubts that the successful should pay their fair share. If Cable was rather more inclined to send out a “millionaires are welcome” message, we’d also have more of them to share that burden.

Mark Littlewood is the former head of media for the Liberal Democrats and is now director-general of the Institute for Economic Affairs.

The rich must pay their fair share. The harder part is spelling out what that is.

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